Tax lien priorities: A federal tax lien is not valid against any purchaser, holder of a security interest, mechanic's lienor, or judgement lien creditor until a notice of the lien has been properly filed (Code sec. 6323 (a)). (In the case of real property, notice of the Federal tax lien must be filed in the one office within the State (or the county or other governmental subdivision) designated by the State where the real property is situated.
Likewise, in the case of personal property, notice of the lien must be flied in the one office within the State (or the county or other governmental sub-division) designated by the State in which the personal property is situated. (Personal property is situated at the residence of the taxpayer.) If the taxpayer has real property located in the District of Columbia, or resides therein, notice of the lien must he filed in the Office of the Recorder of Deeds.
If a State has not designated one office for the filing of notice, then notice of the lien must be filed with the clerk of the US District Court for the District in which the property is situated. (Code sec. 6323 (f))). Moreover, certain commercial transactions financing agreements are protected against a Federal tax lien even though notice of the lien has been filed (Code sec. 6323(c)).
(These agreements are (1) commercial transactions financing agreements. (2) real property construction or improvement financing agreements, and (3) obligatory disbursement agreements). Such a transaction generally is protected if the transaction takes place pursuant to a written agreement entered into with the taxpayer before the date of the filing of the notice of the lien, and is protected under local law against a judgement lien arising, as of the time of the tax lien filing, out of an unsecured obligation. In addition, if these requirements are met, security interests, created within 45 days after the tax lien is filed, in property existing at the time of filing, also are protected (Code sec. 6323(d)).
Ten types of transactions are protected against Federal tax liens without regard to when a purchaser's, creditor's or lienholder's interest in the taxpayer's property arose (Code sec. 6323(b)). A federal tax lien is invalid in the following situations:
(1) Against purchasers of securities, or holders of security interests in securities, who at the time of purchase, or creation, of the security did not have actual notice or knowledge of the existence of tile lien;
(2) against a purchaser of a motor vehicle if, at the time of purchase and taking of possession, the purchaser has no actual notice or knowledge of the existence of the lien and does not thereafter relinquish possession to the seller or his agent;
(3) against a purchaser of personal property at retail in the ordinary course of the seller's business (even if the purchaser knows of the lien), unless the purchaser intends the purchase to (or knows the purchase will) hinder, evade, or defeat the collection of tax;
(4) against a purchaser of household goods, personal effects, or other tangible personal property in a casual sale for less than $250, provided that the purchaser does not have actual notice or knowledge of the lien or of an intention on the part of the seller to dispose of his tangible personal property in a series of sales;
(5) against the holder of a lien under local law to secure the reasonable price of repair or improvement of tangible personal property, so long as the holder is, and has been, continuously in possession of the property from the time the lien arose;
(6) against the holder of a lien on real property to secure payment of:
(a) property taxes,
(b) special assessments imposed on real property by any taxing authority to defray the expenses of any public improvement, or
(c) utility or public service charges for services furnished to the property by any governmental instrumentality (if, under local law, the lien is entitled to priority over security interests in the property that are prior in time);
(7) against a mechanic's lienor with respect to real property subject to a lien for repair or improvement of a personal residence (containing no more than four dwelling units) occupied by the owner, provided that the contract price on the contract with the owner is not more than $1,000;
(8) against an attorney who holds a lien or a contract enforceable under local law against the proceeds of a judgement or settlement of a claim, to the extent of reasonable compensation for services;
(9) against an organisation that is an insurer under a life insurance, endowment, or annuity contract with respect to actions taken before the organisation has actual notice or knowledge of the existence of a tax lien; and
(10) against certain financial institutions with respect to a loan secured by a savings deposit, share, or other account evidenced by a passbook, if the loan was made without actual notice or knowledge of existence of the lien and if the institution has been continuously in possession of the passbook from the time the loan was made. Purchase money mortgages, although not specifically noted in the statute, also are entitled to protection even if they arise after the filing of a Federal tax lien. (See, Rev. Rul. 68 57, 1968-1 C.B. 553.)
RELEASE, DISCHARGE OR SUBORDINATION OF A TAX LIEN
A district director may issue a certificate of release of a lien whenever he finds that the entire tax liability, plus interest, has been satisfied or has become legally unenforceable (Code sec. 6325 (a) and Treas. Reg. sec. 301.6325-1(a)). Moreover, the district director has the discretion to issue a certificate of release of a tax lien if he accepts a bond that is conditioned upon the payment of the amount assessed (together with interest) within the time agreed upon in the bond, but no later than six months before the expiration of the statutory period for collection.
Property subject to a tax lien may be discharged if the value of the property remaining subject to the lien is at least twice the amount of the unsatisfied liability secured by the lien (Code sec. 6325(b) (1)). Furthermore, property subject to a tax lien may be discharged if the Treasury is paid an amount which is not less than the value of the government's interest in the property or if it is determined that the government's interest has no value (Code sec. 6325(b)(2)).
If a dispute arises between competing lienors, including the United States, the property subject to the tax lien may be sold and the proceeds from the sale may be substituted as a fund subject to the claims of the competing lienors (Code sec. 6325(b) (3)).
Under certain conditions, a district director may subordinate a tax lien to another lien or interest in the property. A tax lien can be subordinated to another lien if an amount equal to the lien amount is received (Code sec. 6325(d)(1)). In addition, the district director has the authority to subordinate the government's lien, if it is believed that such action will ultimately aid in the collection of entire lien (This may occur for example in a situation where a farmer needs money to harvest his crop and a bank would be willing to make a loan that is secured by a first mortgage on the farm which is prior to the Federal tax lien. In such a situation the district director might believe that the collection of the tax liability would be facilitated by the availability of cash when the crop is harvested and sold and thus might subordinate the tax lien on the farm to the mortgage securing the crop harvesting loan (see Treas. Reg. sec. 301.6325-1(d)(2)(ii) example (1)).) (Code secs. 6325(d)(2) and (3)).
In order to qualify for subordination, or any other type of discharge from a lien, the interested person must apply in writing to the district director (Treas. Regs. secs. 301.6325-1(b)(4) and (c) and Rev. Proc. 68-8, 1968-1 C.B. 754). In general, the person seeking; to have a lien discharged or subordinated must persuade the district director that to do so would be in the best interests of the government.
In situations where there has been confusion, such as a similarity in names, which results in a mistake in tax lien filing, a certificate of non-attachment of lien, certifying that the property of an individual is free from a tax lien, may be issued (Code sec. 6325(e)).
SPECIAL RULES - GIFT AND ESTATE TAX LIENS Special rules apply with respect to gift tax liens and estate tax liens. In general, a gift tax lien arises at the time a gift is made and attaches to all gifts made during the period for which the return was filed (Code sec. 6324(b)). A gift tax lien continues for ten years from the date of the gift unless sooner terminated. If the gift tax is not paid when due, the donee of the gift becomes personally liable for the tax to the extent of the value of the gift.
An estate tax lien arises at the time of the decedent's death and continues for ten years unless sooner terminated (Code sec. 6324(a)). An estate tax lien attaches to every part of the gross estate, whether or not the property comes into the possession of the duly qualified executor or administrator (Treas. Reg. sec. 301.6324-l(a)). Thus, the attached assets may include such items as gifts made within three years of death and gifts taking effect at death.
Further, special liens apply with respect to deferred estate taxes attributable to a farm or other closely held business and with respect to the recapture of estate taxes attributable to special use valuation of farm or closely held business real property (Code secs. 6324A and 6324B).
ENFORCEMENT OF A TAX LIEN A Federal tax lien may be enforced by sale of seized property (discussed below) or by an action in a US district court to enforce the lien (Code sec. 7403). The Federal Government may intervene in any civil action or suit in order to assert its tax lien (Code sec. 7424). If the application of the government to intervene is denied, the adjudication in such civil action or suit will have no effect on the lien.
Special rules are provided to protect Federal tax liens that are subordinate to other interests and that may be discharged by the holder of a senior security interest in a judicial, or other, State foreclosure proceeding. (Code sec. 7425). In general, if the Federal Government has properly filed a notice of tax lien before a judicial foreclosure proceeding has begun, but has not been joined in the proceedings, a judgement does not discharge the Federal tax lien. However, if notice of a Federal tax lien was not properly filed, then a judgement in a State judicial proceeding discharges the Federal tax lien, if State law so provides. With respect to non-judicial State foreclosure sales, if a notice of the Federal tax lien was filed more than 30 days prior to the sale and the Federal Government was not given notice of the sale, then the Federal tax lien cannot be discharged. The Federal tax lien may be discharged, however, if notice of the Federal tax lien was improperly filed or if the government is properly notified of the sale.
The present law allows a person (other than the person against whom was assessed the tax out of which the levy arose) to bring an action in a Federal district court to recover property which was seized under a wrongful levy (Code sec. 7426). Moreover, a junior lien holder may bring an action to enforce his interest in surplus proceeds realised by the Federal Government on a sale after levy.
C. Levies on and seizure of property for collection of taxes
PROCEDURES FOR COLLECTION OF TAX BY LEVY After a tax assessment has been made, if a person who is liable to pay the tax neglects or refuses to do so within ten days after notice and demand, the district director may collect the tax by levy (Code. sec. 6331(a) and Treas. Reg. sec. 301.6331-1(a)). If the district director finds that the collection of tax is in jeopardy, notice and demand for immediate payment may be made and, upon failure or refusal by the taxpayer to pay, collection of the tax by levy is lawful without waiting the usual ten-day period.
Property subject to levy includes any property, or rights to property, whether real or personal, whether tangible or intangible, belonging to the taxpayer (unless specifically exempted from levy). The district director also may levy upon property with respect to which there is a lien for the payment of tax.
Levy may be made upon the accrued salary or wages of any officer, employee, or elected official of the United States, the District of Columbia, or any agency or instrumentality thereof, by serving a notice of levy upon the employer. Levy also may be made upon the salary or wages of any individual with respect to any unpaid tax after the individual has been notified in writing of the intent to levy (Code sec. 6331 (d)). This notice must be given in person, left at the dwelling or usual place of business of the individual, or be mailed to the individual's last known address, no less than ten days before the day of levy. The notice requirement, however, does not apply if there has been a finding that the collection of the tax is in jeopardy. A levy on salary or wages is continuous from the time of the levy until the liability out of which the levy arose is satisfied or becomes unenforceable due to lapse of time.
In general, any person in possession of (or obligated with respect to) property or rights to property upon which levy has been made must surrender such property or rights (or discharge such obligation) upon demand (Code sec. 6332(a)). (Special rules apply in the case of life insurance and endowment contracts. (See Code sec. 6332(b) and Treas. Reg. sec. 301.6332-2).) This, however, does not apply with respect to property or property rights that are subject to an attachment or execution under any judicial process. A person who fails, or refuses, to surrender any property, or rights to property, upon demand, becomes personally liable for an amount equal to the lesser of the value of the property or the amount of the tax liability with respect to which the levy was made, plus costs and interest from the date of the levy (Code sec. 6332(c)). In addition to personal liability, a person who fails or refuses to surrender property upon which the levy has been made, without reasonable cause, is liable for a penalty equal to 50 percent of the amount for which there is personal liability. (This penalty is not applicable if a bona fide dispute exists concerning the amount of the property to be surrendered pursuant to a levy or concerning the legal effectiveness of the levy (Treas. Reg. sec. 301.6332-1(d)).) A person in possession of property upon which a levy has been made who honours the levy and surrenders the property is discharged from any liability to the delinquent taxpayer (Code sec. 6332(d)).
EXEMPTIONS FROM LEVY Present law exempts from levy the following items of property (Code sec. 6334 and Treas. Reg. secs. 301.6334-1 and 301-6334-2.):
(1) Wearing apparel and school books necessary for the taxpayer or members of his family (not including expensive items that are luxuries);
(2) Fuel, provisions, furniture, personal household effects, arms for personal use, livestock, and poultry, not exceeding $500 in value, provided that the taxpayer is the head of a family;
(3) Books and tools necessary for the trade, business, or profession of the taxpayer, not exceeding $250 in aggregate value;
(4) Unemployment benefits;
(5) Undelivered mail;
(6) Certain annuity and pension payments (That is, annuity or pension payments under the Railroad Retirement Act, benefits under the Railroad Unemployment Insurance Act, special pension payments received by a person whose name has been entered on the Army, Navy, Air Force, and Coast Guard Medal of Honour roll, and annuities based on retired or retainer pay under chapter 73 of title 10 of the US Code.);
(7) Amounts payable under the workmen's compensation laws;
(8) So much of the wages, salary, or other income of the taxpayer as is necessary to comply with a prior judgement of a court of competent jurisdiction for the support of the taxpayer's minor children; and
(9) A minimum amount of wages, salary, and other income (in general, $50 per week plus $15 per week for each dependent).
SEIZURE AND SALE OF PROPERTY As soon as practicable after the seizure of property, notice must be given to the owner of the property. Moreover, notice of sale generally must be published in a newspaper that is published or generally circulated in the county where the seizure was made. The time of sale of seized property may be no less than 10 days or more than 40 days from the time that public notice is given. A minimum price must be determined prior to the sale. If no person offers such minimum price, the property is declared to be purchased at such price by the United States or the property is declared to be sold to the highest bidder. Seized property may be sold only by public auction or by public sale under sealed bids (Code sec. 6335).
Special rules are provided for perishable goods (Code sec. 6336). Such property will be returned to the owner if the owner pays an amount equal to the property's appraised value or gives an acceptable bond. Otherwise, the property will be sold as soon as practicable.
A person whose property has been levied upon has the right to pay the amount due, together with any costs and expenses, prior to the sale of the property (Code sec. 6337). Upon such payment, the property will be returned to the taxpayer. Furthermore, the owner of real property which is sold, his heirs, executors, administrators, or any person having any interest therein, or a lien thereon, or any person in their behalf, may redeem the property sold (or a portion thereof) within 120 days after the sale. Any money realised from the sale of seized property is applied in the following manner: first, against the expenses of the sale; second, against any specific tax liability on the seized property; and, finally, against the liability of the delinquent taxpayer (Code sec. 6342). Any surplus proceeds are credited or refunded to the person or persons legally entitled thereto (generally, the delinquent taxpayer unless another person establishes a superior claim).
RELEASE OF A LEVY A levy may be released, if it is determined that such action will facilitate the collection of the tax liability. Moreover, if it is determined that property has been wrongfully levied upon, the IRS may return the specific property levied upon, an amount of money equal to the amount of money levied upon, or the amount of money equal to an amount of money received by the United States from a sale of such property. Interest at the current effective rate is paid for property seized under a wrongful levy. (Code sec. 6343)
D. Description of procedures relating to the issuance of treasury regulations The principal method used by the Internal Revenue Service to interpret the tax law is regulations adopted as Treasury decisions. (The Internal Revenue Service also uses other methods of issuing interpretations of the tax law. Revenue rulings, ruling letters, and Technical Advice Memoranda are developed by personnel working under the Assistant Commissioner (Technical) and are subject to varying levels of review both within the IRS and by the Office of Chief Counsel and the Treasury Department's Office of Tax Policy, including many of the same personnel who are involved in developing regulations.)
TYPES OF TAX REGULATIONS Tax-regulations are of two broad types. First, interpretative regulations advise taxpayers of the Treasury's interpretation of statutory law. Second, legislative regulations provide detail necessary to implement rules of law pursuant to specific Congressional grants of rule-making authority. Most tax regulations are interpretative. Tax regulations may be relied upon as a precedent by taxpayers and are entitled to a presumption of correctness in court proceedings. Moreover, the position taken in the regulations generally is binding on the IRS.
PROCEDURES FOR ADOPTION OF TAX REGULATIONS Treasury tax regulations are adopted after detailed consideration by the Office of Chief Counsel for the IRS, nearly all functions of IRS, and the Treasury Department Office of Tax Policy. Primary responsibility for drafting regulations and co-ordinating their adoption is assigned to the Office of Chief Counsel for the IRS. The Office of Chief Counsel issues a monthly status report on pending regulations.
DEVELOPMENT OF PROPOSED REGULATIONS Most tax regulations are developed in response to new legislation; however, some regulations result from internal review of existing regulations or suggestions received from the public. When a regulations project is opened, a Regulations Work Plan must be approved by the Chief Counsel, the Commissioner, the Office of Tax Policy, and the Secretary of the Treasury, before further development can proceed beyond the stage of study and issue classification. (Temporary regulations, which are issued to answer questions on an interim basis when timing is critical, and non-significant regulations (primarily those that are only clerical or clarifying) are exempt from the work plan requirement. In addition to the work plan requirement, Treasury Directive 50.04F requires that a regulatory analysis be prepared before development of any regulation whose economic impact is estimated to exceed $50 million.) After the work plan is approved, the regulation project is assigned a priority (priority numbers range from 1 to 3). A preliminary draft of a regulation is prepared in the Office of Chief Counsel and circulated to designated offices for review and comments. The Treasury Department's Office of Tax Policy reviews the draft for legal accuracy, as well as on issues of tax policy.
A revised draft is prepared to incorporate comments from these offices, a proposed notice of proposed rulemaking is forwarded for formal approval to the Assistant Commissioner (Technical), who also co-ordinates with other Assistant Commissioners. After approval by the Assistant Commissioner (Technical), the proposed notice of proposed rulemaking is forwarded for formal approval to the Director of the Legislation and Regulations Division of the Office of Chief Counsel, the Chief Counsel, the Commissioner, the Assistant Secretary of Treasury for Tax Policy, and the Executive Secretariat of the Secretary of the Treasury. (The Paperwork Reduction Act of 1980 (P.L. 96-511) requires Office of Management and Budget review and approval of any "information collection request" imposed by an agency after April 1, 1981. It is unclear whether regulations that impose such requirements are subject to OMB review under this Act, If they are, failure to secure the necessary OMB approval would mean that IRS could not require taxpayers to comply with the requirements after December 31, 1981.) After approval by all of these offices, the proposed regulation is published in the Federal Register together with a request for written comments from members of the public, and notice that a hearing will be held upon request.
PUBLIC COMMENT ON PROPOSED REGULATIONS The standard period allowed for public comment on a proposed regulation is 60 days; however, if public interest warrants, this period is extended by notice published in the Federal Register. If requests for a public hearing are received, a separate notice is published in the Federal Register announcing the date and time of the hearing. A minimum of 30-days notice of the hearing date is provided. The public hearing is the final step in the formal process for public input into the regulatory process.
FINAL APPROVAL AND PUBLICATION OF REGULATIONS After all formal input is completed, the regulation process continues with preparation of a proposed Treasury decision. This proposed Treasury decision is circulated, reviewed, and approved in the same manner as the proposed regulation, first for comment, and then, formally, for approval. After final approval is secured, the regulation is adopted and published in the Federal Register as a Treasury decision.
E. Instalment payments of estimated income tax by individuals
ESTIMATED TAX REQUIREMENTS GENERALLY Declaration and payment of estimated tax generally is required of single persons, or married couples with one earner entitled to file a joint return, whose gross income is expected to exceed $20,000 for the taxable year; a married individual entitled to file a joint return, whose gross income is expected to exceed $10,000 for the taxable year, if both spouses receive wages; and a married individual, not entitled to file a joint return, whose gross income is expected to exceed $5,000 (Code sec. 6015).
In addition, an individual taxpayer who expects to receive more than $500 from sources other than wages (eg, dividends or interest) during the year generally is required to file a declaration of estimated tax. However, no declaration is required if an individual's tax liability for the year, including self-employment tax liability, reasonably can be expected to be no more than $100 over the amounts withheld during the year.
In general, the time for filing declarations of estimated tax is on April 15 if the requirements of Code sec. 6015 are first met on or before April 1 (Code sec. 6073). If the declaration filing requirements are first met after April 1, a calendar year taxpayer must file a declaration in accordance with the following requirements:
For the calendar year taxpayers, estimated tax payments are due on April 15, June 15, and September 15 of the current tax year and on January 15 of the following tax year (Code sec. 6153). Fiscal year taxpayers are subject to similar rules as to time of payment. Farmers or fishermen who expect to receive at least two-thirds of their gross income for the calendar year from farming or fishing may elect to wait until January 15 of the following calendar year to file their declaration or pay the tax.
UNDERPAYMENT PENALTIES Individuals who fail to pay in full an instalment of estimated tax on or before the due date may be subject to a penalty which cannot be waived for reasonable cause (Code sec. 6654). The penalty, which is applied to the period of the underpayment of any instalment at an annual rate of 12 percent, applies to the difference between the payments (including any withholding), if any, made on or before the due date of each instalment and 80 percent (66 2/3 percent for farmers or fishermen) of the total tax shown on the return for the year, divided by the number of instalments that should have been made.
Thus, there is no penalty if the sum of a taxpayer's estimated tax payments, plus taxes withheld, is at least 80 percent (66 2/3 percent for farmers or fishermen) of the tax liability as shown on the tax return. In addition, the present law contains four exceptions to the general underpayment penalty. No penalty is imposed upon a taxpayer if:
(1) total tax payments (withholding plus estimated tax payments) exceed the preceding year's tax liability;
(2) total tax payments exceed the tax on prior year's income under the current year's tax rates and exemptions;
(3) total tax payments exceed 80 percent (66 2/3 percent for farmers or fishermen) of the taxes which would be due if the income already received during the current year were placed on an annual basis; or
(4) total tax payments exceed 90 percent of the tax which would be due on the income actually received from the beginning of the year to the computation date.
F. Time for furnishing forms W-2 to terminated employees
GENERAL REQUIREMENTS Under the present law, every employer who pays wages from which Federal income tax or FICA (Social Security) tax must be withheld is required to furnish each employee a statement (Form W-2) which sets forth: the names of the employer and employee; the amount of wages subject to income tax withholding and the amount withheld; the amount of FICA wages and FICA tax withheld; and the amount, if any, of advance payment of the earned income credit (Code sec. 6051 (a)). In the case of most employees, W-2 Forms for the calendar year must be furnished no later than January 31 of the following year. However, if an employee terminates employment prior to the close of the calendar year, that employee must be furnished with a Form W-2 on the day on which his or her last salary payment is received.
IRS PROCEDURES The Internal Revenue Service has provided through regulations that an employer may furnish a Form W-2 to an employee whose employment terminates prior to the close of the calendar year at any time after the termination but no later than January 31 of the following year. However, if an employee who terminates employment prior to the close of the calendar year requests earlier receipt of a Form W-2, and if there is no reasonable expectation on the part of the employer and employee of further employment during the calendar year, then the employee must be given a Form W-2 on or before the later of the 30th day after the request or the 30th day after the last salary payment (Treas. Reg. sec. 31.6051-1(d)(1)).
H.R. 2676, THE INTERNAL REVENUE SERVICE
Restructuring and Reform Act of 1998
Taxpayer protection and rights
A. Burden of proof
B. Proceedings by taxpayers
1. Expansion of authority to award costs and certain fees
2. Civil damages for collection actions
3. Increase in size of cases permitted on small case calendar
4. Actions for refund with respect to certain estates which have elected the instalment method of payment
5. Review of an adverse IRS determination of a bond issue's tax-exempt status
6. Civil action for release of erroneous lien
C. Relief for innocent spouses and for taxpayers unable to manage their financial affairs due to disabilities
1. Relief for innocent spouses
2. Suspension of statute of limitations on filing refund claims during periods of disability
D. Provisions relating to interest and penalties
1. Elimination of interest differential on overlapping periods of interest on income tax overpayments and underpayments
2. Increase in overpayment rate payable to taxpayers other than corporations
3. Mitigation of penalty for individual's failure to pay during period of instalment agreement
4. Mitigation of failure to deposit penalty
5. Suspension of interest and certain penalties if the secretary fails to contact the individual taxpayer
6. Procedural requirements for imposition of penalties and additions to tax
7. Personal delivery of notice of penalty under section 6672
8. Notice of interest charges
9. Abatement of interest on underpayments by taxpayers in presidentially declared disaster areas
E. Protections for taxpayers subject to audit or collection activities
10. Due process in IRS collection actions
11. Examination activities
a. Uniform application of confidentiality privilege to taxpayer communications with federally authorised practitioners
b. Limitation on financial status audit techniques
c. Software trade secrets protection
d. Threat of audit prohibited to coerce tip reporting alternative commitment agreements
e. Taxpayers allowed motion to quash all third-party summonses
f. Service of summonses to third-party recordkeepers permitted by mail
g. Notice of IRS contact of third parties
12. Collection activities
a. Approval process for liens, levies, and seizures
b. Modifications to certain levy exemption amounts
c. Release of levy upon agreement that amount is uncollectible
d. Levy prohibited during pendency of refund proceedings
e. Approval required for jeopardy and termination assessments and jeopardy levies
f. Increase in amount of certain property on which lien not valid
g. Waiver of early withdrawal tax for IRS levies on employer-sponsored retirement plans or IRAs
h. Prohibition of sales of seized property at less than minimum bid
i. Accounting of sales of seized property
j. Uniform asset disposal mechanism
k. Codification of IRS administrative procedures for seizure of taxpayer's property
l. Procedures for seizure of residences and businesses
13. Provisions relating to examination and collection activities
a. Procedures relating to extensions of statute of limitations by agreement
b. Offers-in-compromise
c. Notice of deficiency to specify deadlines for filing Tax Court petition
d. Refund or credit of overpayments before final determination
e. IRS procedures relating to appeal of examinations and collections
f. Application of certain fair debt collection practices
g. Guaranteed availability of instalment agreements
h. Prohibition on requests to taxpayers to waive rights to bring actions
E. Disclosures to taxpayers
1. Explanation of joint and several liability
2. Explanation of taxpayers' rights in interviews with the IRS
3. Disclosure of criteria for examination selection
4. Explanation of the appeals and collection process
5. Explanation of reason for refund disallowance
6. Statements to taxpayers with instalment agreements
7. Notification of change in tax matters partner
8. Conditions under which taxpayers' returns may be disclosed
9. Disclosure of Chief Counsel advice
F. Low-income taxpayer clinics
G. Other provisions
1. Cataloging complaints
2. Archive of records of Internal Revenue Service
3. Payment of taxes
4. Clarification of authority of Secretary relating to the making of elections
5. IRS employee contacts
6. Use of pseudonyms by IRS employees
7. Illegal tax protestor designations
8. Provision of confidential information to Congress by whistleblowers
9. Listing of local IRS telephone numbers and addresses
10. Identification of return preparers
11. Offset of past-due, legally enforceable State income tax obligations against overpayments
12. Reporting requirements relating to education tax credits
H. Studies
1. Administration of penalties and interest
2. Confidentiality of tax return information
3. Non-compliance with internal revenue laws by taxpayers
4. Payments for informants
Taxpayer protection and rights
A. BURDEN OF PROOF The bill provides that the Secretary shall have the burden of proof in any court proceeding with respect to a factual issue if the taxpayer introduces credible evidence with respect to the factual issue relevant to ascertaining the taxpayer's tax liability. Four conditions apply. First, the taxpayer must comply with the requirements of the Internal Revenue Code and the regulations issued thereunder to substantiate any item (as under present law). Second, the taxpayer must maintain records required by the Code and regulations (as under present law). Third, the taxpayer must cooperate with reasonable requests by the Secretary for meetings, interviews, witnesses, information, and documents. Fourth, taxpayers other than individuals must meet the net worth limitations that apply for awarding attorney's fees. The provision applies to income, estate, gift, and generation-skipping transfer taxes.
The provision applies to court proceedings arising in connection with examinations commencing (or taxable periods or events beginning or occurring) after the date of enactment.
B. PROCEEDINGS BY TAXPAYERS 1. Expansion of authority to award costs and certain fees
The bill increases the hourly fee cap on attorneys' fees and expands the circumstances under which attorneys fees and administrative costs may be awarded to taxpayers, effective for costs incurred and services performed more than 180 days after the date of enactment.
2. Civil damages for collection actions
The bill permits up to $100,000 in civil damages caused by an officer or employee of the IRS who negligently disregards provisions of the Code or Treasury regulations in connection with the collection of Federal tax with respect to the taxpayer. The bill also permits up to $1 million in civil damages caused by an officer or employee of the IRS who wilfully violates provisions of the Bankruptcy Code relating to automatic stays or discharges. These provisions are effective for actions of officers or employees of the IRS occurring after the date of enactment.
3. Increase in size of cases permitted on small case calendar The bill increases the cap for small case treatment in the Tax Court from $10,000 to $50,000, effective for proceedings commenced after the date of enactment.
4. Actions for refund with respect to certain estates which have elected the instalment method of payment
The bill grants the US Court of Federal Claims and the US district courts jurisdiction to determine the correct amount of estate tax liability (or refund) in actions brought by taxpayers deferring estate tax payments under section 6166, as long as certain conditions are met. The bill further provides that once a final judgement has been entered by a district court or the US Court of Federal Claims, the IRS is not permitted to collect any amount disallowed by the court, and any amounts paid by the taxpayer in excess of the amount the court finds to be currently due and payable are refunded to the taxpayer, with interest. The provision is effective for claims for refunds filed after the date of enactment.
5. Review of an adverse IRS determination of a bond issue's tax-exempt status The bill directs the Internal Revenue Service to modify its administrative procedures to allow tax-exempt bond issuers examined by the IRS to appeal adverse examination determinations to the Appeals Division of the IRS as a matter of right. Such an appeal is to be considered by senior personnel with experience in tax-exempt bonds issues. The direction to the IRS is effective on the date of enactment.
6. Civil action for release of erroneous lien The bill establishes an administrative procedure permitting a record owner of property against which a Federal tax lien has been filed to obtain a certificate of discharge of property from the lien as a matter of right if such record owner is not the person whose unsatisfied liability gave rise to the lien. The record owner is required to apply to the Secretary of the Treasury for such a certificate and either to deposit cash or to furnish a bond sufficient to protect the lien interest of the United States. The provision is effective on the date of enactment.
C. RELIEF FOR INNOCENT SPOUSES AND FOR TAXPAYERS UNABLE TO MANAGE THEIR FINANCIAL AFFAIRS DUE TO DISABILITIES
1. Relief for innocent spouses The bill generally makes innocent spouse relief easier to obtain. The bill eliminates all of the understatement thresholds and requires only that the understatement of tax be attributable to an erroneous (and not just a grossly erroneous) item of the other spouse.
The bill also provides a separate liability election for a taxpayer who, at the time of the election, is no longer married to, is legally separated from, or has been living apart for at least 12 months from the person with whom the taxpayer originally filed a joint return. Such taxpayers may elect to have the liability for any deficiency limited to the portion of the deficiency that is attributable to items allocable to the taxpayer. The election is not available if the Secretary demonstrates that assets were transferred between individuals filing a joint return as part of a fraudulent scheme of the individuals or if both individuals had actual knowledge of the understatement of tax.
Expanded innocent spouse relief and the separate liability election must be elected no later than two years after the date on which the Secretary has begun collection activities with respect to the individual seeking the relief. The bill provides that the Tax Court has jurisdiction with respect to disputes about innocent spouse relief.
The bill further authorises the Secretary to relieve an individual of liability if relief is not available under the expanded innocent spouse rule or the separate liability election, but it would be inequitable to hold the individual liable for any unpaid tax or any deficiency.
The expanded innocent spouse relief, separate liability election, and authority to provide equitable relief apply to liabilities for tax arising after the date of enactment, as well as any liability for tax arising on or before the date of enactment that remains unpaid on the date of enactment.
2. Suspension of statute of limitations on filing refund claims during periods of disability
The bill permits equitable tolling of the statute of limitations for refund claims of an individual taxpayer during any period of the individual's life in which he or she is unable to manage his or her financial affairs by reason of a medically determinable physical or mental impairment that can be expected to result in death or to last for a continuous period of not less than 12 months. Tolling does not apply during periods in which the taxpayer's spouse or another person is authorised to act on the taxpayer's behalf in financial matters. The provision applies to periods of disability before, on, or after the date of enactment but does not apply to any claim for refund or credit which (without regard to the provision) is barred by the statute of limitations as of the date of enactment.
D. PROVISIONS RELATING TO INTEREST AND PENALTIES
1. Elimination of interest differential on overlapping periods of interest on income tax overpayments and underpayments
The bill establishes a net interest rate of zero when interest is payable and allowable on equivalent amounts of overpayment and underpayment of any taxes imposed by Title 26 (the Internal Revenue Code) that exist for any period. Each overpayment and underpayment is considered only once in determining whether equivalent amounts of overpayment and underpayment exist. The special rules that increase the interest rate paid on large corporate underpayments and decrease the interest rate received on corporate underpayments in excess of $10,000 do not prevent the application of the net zero-rate. The provision applies to income taxes and self-employment taxes. The provision applies to interest for periods beginning before the date of enactment if: (1) the statute of limitations has not expired with respect to either the underpayment or overpayment; (2) the taxpayer identifies the periods of underpayment and overpayment for which the zero-rate applies; and (3) on or before December 31, 1999, the taxpayer asks the Secretary to apply the zero-rate.
2. Increase in overpayment rate payable to taxpayers other than corporations
The bill provides that the overpayment interest rate will be AFR plus three percentage points, except that for corporations, the rate remains at AFR plus two percentage points. The provision is effective for interest for the second and succeeding calendar quarters beginning after the date of enactment.
3. Mitigation of penalty for individual's failure to pay during period of instalment agreement
The bill provides that the penalty for failure to pay taxes is one half of the usual rate (.25 percent instead of .50 percent) imposed with respect to the tax liability of an individual for any month in which an instalment payment agreement with the IRS is in effect, provided that the individual filed the tax return in a timely manner (including extensions). The provision is effective for instalment agreement payments made after December 31, 1999.
4. Mitigation of failure to deposit penalty for payroll taxes
The bill allows the taxpayer to designate the period to which each deposit is applied. The designation must be made no later than 90 days of the related IRS penalty notice. The provision extends the authorisation to waive the failure to deposit penalty to the first deposit a taxpayer is required to make after the taxpayer is required to change the frequency of the taxpayer's deposits. The provision is effective for deposits required to be made more than 180 days after the date of enactment. The bill also provides that, for deposits required to be made after December 31, 2001, any deposit is to be applied to the most recent period to which the deposit relates, unless the taxpayer explicitly designates otherwise.
5. Suspension of interest and certain penalties if Secretary fails to contact individual taxpayer
The bill suspends the accrual of certain penalties and interest after one year if the IRS has not sent the taxpayer a notice specifically stating the taxpayer's liability for additional taxes (and the basis for the liability) within one year following the date which is the later of (1) the original due date of the return or (2) the date on which the individual taxpayer timely filed the return. The suspension only applies to individuals who file a timely tax return and does not apply to the failure to pay penalty, in the case of fraud, or with respect to criminal penalties. The provision is effective for taxable years ending after the date of enactment. With respect to taxable years beginning before January 1, 2004, the one-year period is increased to 18 months. Interest and penalties resume 21 days after the IRS sends a notice to the taxpayer specifically stating the taxpayer's liability and the basis for the liability. The provision is applied separately with respect to each item or adjustment.
6. Procedural requirements for imposition of penalties and additions to tax The bill requires that each notice imposing a penalty include the name of the penalty, the Code section imposing the penalty, and a computation of the penalty. The bill also requires the specific approval of IRS management to assess all non-computer generated penalties unless excepted. This provision does not apply to failure to file penalties, failure to pay penalties, or to penalties for failure to pay estimated tax. The provision is effective with respect to notices issued, and penalties assessed, after December 31, 2000.
7. Personal delivery of notice of penalty under section 6672 The bill permits in-person delivery, as an alternative to delivery by mail, of a preliminary notice that the IRS intends to assess a 100-percent penalty, effective on the date of enactment.
8. Notice of interest charges The bill requires every IRS notice that includes an amount of interest required to be paid by the taxpayer that is sent to an individual taxpayer to include a detailed computation of the interest charged and a citation to the Code section under which such interest is imposed, effective for notices issued after December 31, 2000.
9. Abatement of interest on underpayments by taxpayers in presidentially declared disaster areas The bill provides that taxpayers located in a presidentially declared disaster area do not have to pay interest on taxes due for the length of any extension for filing their tax returns granted by the Secretary of the Treasury, effective for disasters declared after December 31, 1997, with respect to taxable years beginning after December 31, 1997. The provision is designated as emergency legislation under section 252(e) of the Balanced Budget and Emergency Deficit Control Act.
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Date requirements are met Date declaration is due
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After Apr. 1 & before June 2 June 15.
After June 1 and before September 2 September 15.
After September 1 January 15 of succeeding year.
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(To be continued)
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